MAS worried when core inflation hit 3.1%

Good thing it is expected to ease to 2% by the end of the year.

According to Ravi Menon, Managing Director, Monetary Authority of Singapore, MAS is narrowing forecast range for CPI-All Items inflation in 2012 to 4.0-4.5%, but the forecast for Core Inflation remains unchanged at 2.5-3.0%.

Here's more from Mr Menon:

Bringing down inflation remains one of MAS’ top priorities. The figure we watch most closely is Core Inflation, which excludes the costs of accommodation and private road transport. We were concerned when Core Inflation came in at 3.1% in the first quarter of this year. This reflected high commodity prices and the pass-through of strong wage growth in 2011. In the second quarter, Core Inflation moderated to 2.7%. It is likely to ease further and approach 2% by the end of the year. This is not far from the historical average of 1.7%.

There are several factors driving moderation in Core Inflation during the course of the year.

First, oil prices. Global oil prices were at US$103 per barrel in the first quarter of the year. They are now around US$90. For the rest of the year, they should remain in the US$90-95 range on average, barring deterioration in the geo-political situation in Middle East. The easing of global oil prices is already passing through to prices of domestic oil-related items. Let me give a couple of examples. Electricity tariffs for households came down by 2.5% in July, the first reduction this year. Likewise, petrol pump prices have fallen for three consecutive months, by a cumulative 9% from March. Going into the second half of the year, domestic oil-related prices are expected to keep largely stable.

Second, food prices. Global food commodity prices, as measured by the UN FAO Food Price Index, were 5.4% lower in June compared to beginning of the year. This has started to feed through to domestic food inflation, which came down from 3.8% y-o-y in January to 2.3% in June. Recently, there has been spike in global corn and soya bean prices due to a drought in US. But we do not expect a broad-based surge in global food prices in coming months, and so domestic food inflation should remain relatively contained for rest of year.

Third, domestic wages. The 6% increase in domestic wages last year passed through quite strongly into a variety of services costs earlier this year. We can expect some continued pass-through of wage costs for the rest of this year, but at a more restrained pace compared to early this year.